Killing the EPF

Subscribers to the Employees’ Provident Fund Organisation (EPFO) witnessed a rude year-end shock with the Central Board of Trustees (CBT) of the EPFO setting the interest rate for 2016-17 at 8.65 per cent compared to the earlier 8.8 per cent set for the previous year. The continued reduction of the EPF interest rate is an indication of how the EPFO is not able to manage higher returns from an instrument that is largely invested in fixed return securities. Earlier in 2016, the labour minister Bandaru Dattatreya had mentioned to us that work was on to educate and spread the importance of increasing the EPF contributions towards equities through investments in exchange traded funds (ETFs). The trust had also approved increasing the contribution to the market-linked ETFs for the remaining 2016-17 financial year.

The rates of the other two fixed return instruments that also provide similar tax benefits—PPF and Sukanya Samriddhi Scheme offer 8 per cent and 8.5 per cent return respectively at the moment. Yes, the EPF does look a shade better in comparison to its peers, but do not be blindly guided by returns. For scores of EPFO members, there is little choice when it comes to contributing towards their retirement. Their only hope is for the equity allocation to work in their favour in the long run. For them the lower return on their EPF contributions each passing year is a reality that needs to sink in.

The way the retirement savings space is emerging, there is need for people to consider other options to build their retirement corpus, like the NPS for instance. The NPS, with its different fund options has a lot of flexibility by way of investment option to an account holder. Although the NPS in comparison to the EPF is not fully tax free at the time of exit, it does hold promise to earn a better return to negate this lacuna. Further, the additional tax benefit up to Rs 50,000 contribution to the NPS, is a huge pull and should be considered as an additional benefit to claim over the EPF. For those starting their careers, the choice is evidently pointing towards the NPS.